The Future of Advertising and the Value of Social Network
Websites: Some Preliminary Examinations
Eric K. Clemons Steve Barnett
clemons@wharton.upenn.edu steve@bardoconsulting.com
Categories & Subject Descriptors:
H.5.1 Multimedia Information Systems, Artificial, augmented,
and virtual realities
General Terms:
Design, Economics, Legal Aspects
Keywords:
digital culture, online advertising, virtual self, virtual worlds
1. INTRODUCTION
A confluence of changes has reduced the impact of traditional
advertising. Lord Leverhulme complained that “half of money I
spend on advertising is wasted, I just don’t know which half!” In
contrast, were he writing today he would sound somewhat
different. An optimistic advertiser might claim that it is now
possible to identify the positive impact of every dime spent; a
more pessimistic one might note simply that he now knows, with
certainty, that both halves are wasted. Some of these changes that
have reduced the impact of advertising are a result changes in
customer media preferences and viewing behavior, some are due
to new technological alternatives, some may be due to changes in
consumer purchasing behavior and the changing status-signaling
value of many possessions, and some are due to changes in
consumers’ trust of paid messages.
There has been a rush to acquire social networking websites such
as MySpace and YouTube by both traditional media companies
such as News Corp and internet giants such as Google. The
acquirer’s own press releases suggest that they believe that these
acquisitions are justified because of the websites’ potential to
generate enormous profits through advertising. In contrast, we
believe that the current rush to social networking websites as an
alternative to traditional may reflect merely the next ill-advised
wave of irrational exuberance in pursuit of internet opportunities,
although some websites may prove to have profound value.
This paper is written from the perspective of an anthropologist
doing ethnographic field research and observation, and from the
perspective of a strategist examining resources and their deploy-
ment, potential sources of economic rents, and the defensibility of
any potential super-normal rents. It does not focus on technology
or on current usage patterns. Section 2 presents a very short
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267
Arjun Appadurai
appadura@newschool.edu
review of networks and social networks. Section 3 presents a
review of changes in advertising, section 4 reviews problems
currently facing advertisers, and section 5 reviews common
mistakes and inappropriate responses seen from advertisers facing
these problems. Section 6 reviews the questionable value of many
social networking websites, while section 7 shows how some may
indeed have value. Section 8 examines some websites with true
resonance may have value, although section 9 reviews the
difficulties and uncertainties associated with converting even
resonant websites into commercial propositions. Our conclusions
and early predictions are shown in section 10.
2. SOCIAL NETWORKS
Social networks are familiar to all who study primates, from
baboon troops and gorilla and chimpanzee groups to human
societies in all levels of cultural development [6] [7] [12]. A
social network can be a group of friends living within a city, or a
group of college classmates who remain in frequent contract
socially. It can also be a group formed specifically to accomplish
a poorly structured set of tasks over time, like the old GBN1.
Humans in all cultures at all times form complex social networks;
the term social network here means ongoing relations among
people that matter to those engaged in the group, either for
specific reasons (like fantasy football, cancer support groups, task
1
Two of the authors met while members of GBN, an informal
network of business experts from a wide range of disciplines.
One of us was asked by a traditional consulting firm client to help
them with a difficult client engagement; they had a final report
due for an oil industry client and the client was deeply dissatisfied
with work that it had taken them months to complete. Working
through a GBN member with extensive oil industry contacts,
within two days we had set up a range of appointments in New
York and London, within a week we had completed the
interviews, and within two weeks we had completed a report that
delighted the client. Working through the network we were able
to meet the head of oil trading at Shell and BP, the oil futures
floor trader on NYMEX from Salomon (Phibro) and the head of
oil trading at Goldman Sachs (J. Aaron), as well as specialists in
oil trading information (Reuters) and exchange operations
(International Petroleum Exchange, London). This form of social
network can have great commercial value. Interestingly, such
work-focused and geographically dispersed social networks often
collapse over time as they get larger, as the sense of shared
purpose diminishes, and as members see more clearly what
participation costs them, and see less clearly the benefits that they
themselves obtain. This may not be the direct result of actual
free-riding, so much as it is the indirect result of the perception of
free-riding that arises as networks grow and members become less
tightly linked by bonds of actual friendship.
forces at work) or for more general expressions of mutual
solidarity (like families, clans, friends, social clubs). Social
networks are validated by shared perceptions of worth, typically
expressed as cultural symbols. For example, families in various
societies agree on what symbolically connects them, whether
“blood purity” for Indian castes or “genes” for Western families.
Likewise, social networks among individuals who may not be
related can be validated and maintained by agreement on
objectives, social values, or even by choice of entertainment, such
as a group of people who meet for tailgating parties at when their
professional football team plays home games.
Membership in these networks can be relatively permanent
(extended families, which endure for lifetimes) or flexible
(pregnancy support groups, in which members rotate out after a
few months). They involve reciprocal responsibilities and roles
that may be altruistic or self-interest based (or a combination or
both). Cultural anthropologists have written extensively about
these networks, from studies of caste and marriage systems to
informal links in the workplace or in the neighborhood. Network
members tend to trust and rely on each other, and to provide infor-
mation that other members find useful and reliable. Social
networks are trusted because of shared experiences and the
perception of shared values or shared needs — a professor is
likely to request recommendations for an accountant from another
professor, assuming that their requirements are similar and that a
colleague’s recommendation will be both relevant to his needs
and trustworthy. New parents will get recommendations from
their neighbors for a pediatrician and, over time, will get
recommendations for a baby sitter. Friends tell friends about
restaurants and movies. It is not yet clear to what extent virtual
social networks are trusted or valued2.
The newest attempts at the development of social networks have
tried to create online social networks without relying upon initial
face-to-face encounter to create the network; Facebook, MySpace,
and YouTube are simply the best known and most publicized of
this new generation of social networking websites. Ever since the
Internet began to develop online “communities,” starting with The
Well in Berkeley, there has been active debate about whether
online communities actually replicate in crucial ways face-to-face
2
Linkedin is an online social network designed to help people
make contacts (see http://www.linkedin.com/). Most people are
aware of it, if only because of the solicitations that they receive
from friends who are already members; actually, the solicitations
come from friends’ computers, which may make them easier to
ignore. Some people love Linkedin because it enables them to
work through people they know, and then through people that
those people know, to reach almost anyone. Indeed, if you
subscribe to the “six degrees of separation” theory, you believe
that you can use Linkedin to reach anyone in the US. On the
other hand, while most people are aware of it, and some people
love it, most professionals over about 30 distrust it and have
refused to participate. The most frequent complaint is free-riding,
receiving requests from people you don’t know, arranged through
people you don’t know, requesting introductions that at best do
nothing for you and at worst cause you to exploit friendships that
do matter to you, with no idea of how your friends will view your
intervention. It appears that even using established physical
communities to create online and virtual social communities may
still be quite difficult.
268
networks. Howard Rheingold in a number of articles and books
has been the strongest advocate of the depth and power of online
communities as “actual” social networks that correspond in
important ways to older forms of networking [10]. Others, like
John Perry Barlow, have suggested the opposite – that online
communities are at best truncated networks, lacking in depth and
intensity3; in Barlow’s view, participants in online social networks
do not have to interact in multiple and complex ways but rather
can assume special identities only for online interactions and can
also end these interactions more abruptly than in “real life.” For
the most part, we agree with Barlow, with the caveat that as
Internet possibilities expand and the intensity enabled by wider
bandwidth is exploited, the potential for social networks may
grow beyond what we see at present. The virtual reality shared
world, Second Life, enables participants enter a complex world, to
choose their avatars (physical manifestation), to build homes and
businesses, and to a great extent shape the evolution of that world.
Online businesses in Second Life sell prime “real estate,” virtual
homes in preferred locations, or sell real music that can enjoyed
offline. Politicians hold press conferences and meetings. The
online interactions in Second Life have morphed into actual
businesses, with monetary transactions that can be converted into
US (real world) dollars, so that actual money is now a part of a
virtual environment.
Our own experience is that the behavior of individuals in online
networks can be very different from the behavior of the same
individuals interacting in a more traditional social network. Since
its inception over 200 years ago the motto of the London Stock
Exchange has been “dictum meum pactum,” and members
observed the highest ethical standards in their face-to-face
interactions. The members knew whom they were interacting
with even after the move to online trading; when the head oil
stock market maker at S.G. Warburg was the most respected oil
man in London, random manipulations of his trading prices were
immediately matched by other market makers in The City4. And
yet their behavior towards each other was dramatically different
when they abandoned the floor and its face-to-face interaction; on
numerous occasions we observed members complaining about
other members behavior, and even demanding and receiving
apologies for it.
For this paper, we focus on a different kind of online network, the
next generation of Internet interactions embodied in Facebook,
MySpace, Linkedin, and YouTube. These are more mature than
virtual reality worlds and games, and are definitively quite
different from offline networks. They allow anyone to add to their
network of “friends,” and while this makes it easy to construct and
to navigate a network of relationships, friendship relationships
may lack a corresponding basis in contact, shared experience, or
shared values. Online friendships need not be trusted
relationships validated by history and this shared experience. It
does not immediately follow that online network members look to
each other for advice and support on a wide range on concerns,
from product evaluations to life choices; that is, a declared
3
As befits a subject of this complexity, John Perry Barlow argues
both sides of each of his positions ( http://www.wired.com/wired/
archive/1.02/streetcred.html?pg=17)
4
This effect was observed by observation while studying the
move to screen-based trading in London and by experiment [4]
[5].
friendship network in Facebook may not confer the same degree
of trust that actual friendship and participation in social networks
historically do offline. People who participate in these
connections typically do not look to other participants as valued
sources of objective information. This is critical since the business
model for the acquisition of social networking websites assumes
that advertising can be moved to these websites, based upon the
presence of trust among members (viral marketing) or upon the
transfer of trust from the online relationships to the owner and
operator of the website itself (traditional advertising). In contrast,
in the remainder of this paper we will suggest that advertising in
these online venues will be unsuccessful, and that at best
advertising will be little more than irrelevant to viewers and waste
of advertisers’ money; at worst, advertising will be seen as an
unwelcome intrusion, and as reducing the value of the social
website to its participants.
Virtual social networks can allow participants a high degree of
freedom to explore not only relationships that they would not
explore in the real lives, but also to explore who and even what
they want to be. Individuals can choose to be real, idealized, or
ordinary (see figure 1).
Figure 1. Three avatars, or virtual manifestations, of residents
of Second Life, taken from Flickr.com
Our focus in the rest of this paper will be on internet interactions
and virtual communities, in multiple categories:
• Facebook and MySpace
• Linkedin
• YouTube
• Multi-user domains and massively multi-user domains such
as the Second Life virtual reality site and gamer sites such
as World of WarCraft
These have experienced tremendous commercial interest,
including a rash of high-profile and high visibility acquisitions.
They are often believed to be trusted communities, and are often
seen as the next generation of marketing, which we will address
below. Second Life can be used to hold meetings and other
activities, which are intended ultimately to be able to replace
actual meetings, or for activities that we hope would not have
counterparts in our physical space.
3. MARKETING HAS CHANGED AND
PUSH-BASED ADVERTISING IS DYING:
3.1. Loss of Trust in Advertising
The public distrusts advertising messages and advertising is losing
much of its impact. Recent experiments by MIT Professor Dan
Ariely confirm the extent to which consumers have come to
269
distrust paid advertising and come to distrust information that they
is pushed at them from a source that is seen as having an interest
in influencing outcomes 5 . This is true whether the provided
information comes from a trusted company or a political party.
Professor Ariely describes two experiments, both of which are
aimed at assessing the extent to which consumers alter their
perception of the reliability of statement based solely on its
source.
• In one of Professor Ariely’s experiments subjects were
asked to assess the truth value of a large collection of
statements; half were indeed true, but consistent with a
slight but well known bias towards trust subjects accepted
about 55% of the statements. The willingness to accept the
statements dropped significantly, and the fraction accepted
was closer to one third, when the statements were attributed
to the Democratic Party, the Republican Party, or to Procter
& Gamble. Interestingly, the willingness to accept state-
ments from either party was not significantly better among
members of that party than among members of the
opposition party. Equally interestingly, this lack of trust
was evidenced in the rejection of statements that had
nothing to do with candidates, with the policy of either
party, or with products from P&G or its competitors.
• In a second experiment, subjects read a review of a stereo
system and then listened to the stereo and were asked to rate
it. In one case subjects were told that the review was from a
highly regarded stereo store close to MIT and in another
case they were told that the review was from Consumer
Reports; in both cases the wording of the review and stereo
and the listening conditions for the stereo were identical.
Subjects were asked to evaluate and rate the stereo after
listening to it. Although there were no wording differences
between the reviews shown the different subjects and the
stereo and the listening conditions were identical, subjects
who believed the favorable review was from Consumer
Reports actually gave the stereo significantly higher
assessments after listening. If the review was from a
disinterested source, subjects either (1) actually experienced
the stereo as superior, or (2) were less willing to contradict
the source.
Professor Ariely describes the collapse of credibility of paid
messages as an example of the “Tragedy of the Commons.” [9] In
the traditional tragedy of the commons, all households start by
grazing a single cow, the commons supports all cows, and every
household has enough milk. A single resident decides to graze
two cows; the decrease in the welfare of each cow is small, no
household suffers significantly, and the individual with two cows
is almost twice as well off as he was before addition of the second
cow. One by one, each of his neighbors adds a second cow as
well, until ultimately the common land is over-grazed, each cow is
near starvation gives very little milk, and everyone is worse off
than before. Tragically, at this point no single cow can provide
enough milk to support its owner, and every household needs to
add a second cow just to survive. Similar phenomena are already
observed in the significant collapse of numerous commercial fish
harvests. Ariely argues that as long as any single advertiser is
tempted to over-claim, over-grazing in the commons of
5
This section is based on recent and unpublished work by
Professor Ariely at MIT’s Media Lab.
consumers’ trust, consumers’ trust will be weakened, additional
advertisers will be tempted to make exaggerated claims in order to
have an impact on consumers’ perceptions, and ultimately each
advertiser will be forced to over-promise and to over-claim. This
will effectively over-graze the commons of consumer trust,
explaining the phenomena that Professor Ariely observes in his
experiments.
3.2. Alternative Advertising
Advertisers who have come to realize that consumers reject their
claims have developed alternatives to their traditional messages
hyping their products:
• The ironical approach to advertising was popularized by
Isuzu’s lying pitchman, Joe Isuzu. Nothing that Joe Isuzu
said was true, and that, apparently, was part of the charm of
Joe Isuzu’s message. It is still possible to see some of the
early Isuzu commercials on YouTube, at
http://www.youtube.com/watch?v=mwsp_NW5nlg.
• The warm and soft, almost content-free approach that
informs Microsoft’s two recent advertising campaigns,
“Where do you want to go today” and “Your Potential, Our
Passion.”
While Joe Isuzu is long gone, both the self-deprecating ironical
style and the soft and emotive style of advertising continue. The
power of either, in the presence of customer informedness,
remains unproven.
3.3. Informedness
Consumers increasingly make their fine-tuned purchasing
decisions based on their strong individual preferences, and
consumers are now far better informed about their options than
they were previously. Consumers know what is available, they
know what it costs, and they know what they want [2] [3] [11].
• This increase in informedness has greatly reduced the prices
that consumers will pay for commodities; if all flights to
San Francisco or all copies of a Harry Potter novel as seen
as interchangeable, then the competition discount that
results from informedness drives prices down.
• Likewise, if consumers have a more complete
understanding of what they want and of what is available to
them in the marketplace, then they will pay less for
products that do not precisely match their preferences,
wants and needs, cravings and longings. Informedness
increases the compromise discount.
• When consumers more fully understand what is available to
them, they are more willing to pay premium prices for new
products and services that do precisely match their prefer-
ences, and their wants and needs, cravings and longings,
even if they are unfamiliar both with the new offerings and
with their providers. The power of established brands and
established providers is eroding, as informedness greatly
reduces the uncertainty discount, which penalized new
offerings.
Our data and our analyses support the fact that the increase in
consumer informedness is real, that it significantly alters
consumer behavior, and that its effects are complex and vary by
category and vary with the nature of the consumer’s objectives.
270
• In categories where consumers seek to avoid bad
experiences, it is the absence of negative ratings that
correlate with sales
• When consumers seek delight and are willing to pay
premium prices, it is the strength of the best reviews that
predict sales.
Both effects suggest an increasing role for true awareness of the
full range of choices, including prices and product attributes.
The available information indicates that informedness alters
customers’ shopping behavior even for purchases that are made in
traditional physical venues. The vast majority of consumers,
estimated at 90%, perform some type of online comparison
shopping and online price comparisons in particular before
visiting a car dealer, even though virtually no car purchases are
made fully online today. Likewise, our previous studies indicate
that informedness alters beer purchases, although for reasons
ranging from shipping costs to state regulations virtually no beer
is actually bought or sold online.
The combination — purchases based on true informedness and the
decreasing role of paid advertising — suggests that to a great
extent organic informedness is replacing paid corporate
promotions.
4. REACHING CONSUMERS THROUGH
ADVERTISING IS SIGNIFICANTLY
MORE DIFFICULT THAN IN THE PAST
There are now more media choices for the viewer. First there
were three television channels, each a member of a national
network. Next there were small independent stations, UHF, rather
than VHF. Then CATV (community access television), provided
by cable operators, provided still more choice. Now cable
subscribers can have access to over 100 channels; the addition of
premium channels brings the number of choices to close to 400,
and then on demand capability adds hundreds more choices.
Rarely does a significant portion of a potential market for a
product view the same shows, tremendously diluting the impact of
media for the delivery of advertising messages. It is widely
observed that the TV audience is increasingly fragmented into
large numbers of smaller special interest audiences. For example,
the Journal Star6 notes, “The mass audience in the United States
is splintering and dividing into ever more specialized and
personalized niches.”
There are more alternatives to media broadcasts, such as iPods,
DVDs, and video games, reducing the amount of time spent
watching traditional television broadcasts. Indeed, a quick web
search with Google identified over 1 million web pages that
referenced declining television viewership, by decade, by market
segment and age group, or by type of station or type of
programming.
• According to our colleagues at Ogilvy & Mather7, broadly
speaking network TV viewers are down 15% over the last 2
years and this number grows to 22% for younger (14-22)
6
http://www.journalstar.com/articles/2005/11/06/sunday_am/
doc4367f68466ce4751333244.txt.
7
Personal communication, 30 November 2006.
 people. Cable TV is more tightly targeted than network TV
and ads appeal to smaller numbers of viewers, but viewers
who are supposedly more interested. And TV is declining in
favor of various podcasts, games, and other sources of
entertainment directly available on PDAs and computers.
• Some formats of broadcast television have suffered more
than others. Broadcast national and local news, both
networks and cable, have seen their viewership collapse;
after the evening news destroyed the afternoon metropolitan
newspapers throughout the United States, they have since
largely been replaced by on a shift to demand internet news.
The State of the News Media 2006 (Annual Report on
American Journalism) notes that although morning news
also suffered, evening news viewership over all networks
declines from approximately 52 million viewers in 1980 to
approximately 27 million today 8 . The Washington Post
reports similar loss of television viewers to the internet9 .
The last two years have been especially brutal, with
networks news down from 38% to 30% and local news
viewership down from 64% to 56% in just the past two
years.
• Newspapers continue to lose readers to websites as well10.
• And for some age groups the loss has been even more
dramatic. “…for the core video gamer demographic, 18-34
males, TV consumption has declined by roughly 12% while
spending 20% more time playing games. And when people
do watch TV, they TiVo through the ads, talk on the phone
and/or surf the Internet … .11”
5. MIS-INTERPRETING IMPLICATIONS
OF FAILED ADVERTISING
It is easy and comforting for advertisers and their agencies to
believe that the failure of advertising is caused by technology
(TiVo) or by media fragmentation rather than by consumers’ loss
of interest in current media choices. Likewise, it is easy and
comforting to believe that the failure of advertising is caused by
technology, media, and other alternatives rather than a growing
distrust of all paid push-based communications. These mistakes
result in simplistic search for alternative media as the easiest
response to the belief that is current media that are failing them,
not consumers’ unwillingness to accept their message. Media
giants, advertisers, and their agencies all do want to believe that
the problem is that they are pitching their message via the wrong
channels.
The belief that the problem is with the media and not with the
message is driving advertisers and their agencies into a frenzied
search for alternative media. This search for alternative means to
deliver the same message does much to explain the very high and
8
http://www.stateofthenewsmedia.org/ 2006/narrative_networktv
_audience.asp?cat=3&media=5
9
http://www.washingtonpost.com/wp-
srv/politics/polls/wat/archive/wat061900.htm.
10
http://www.usatoday.com/money/media/2006-05-08-
newspaper-circulation_x.htm.
11
http://www.doublefusion.com/advertisers-media-
buyers/market-overview.php.
271
potentially absurd valuations on Facebook, MySpace, and
YouTube:
• YouTube has no revenues and ever-increasing expenses as
both the storage needed for its user-provided video
increases with postings and the bandwidth required to serve
its viewers increases with the number of users. YouTube
has been hit with litigation and threats of litigation; indeed,
some of the parodies of corporate advertisements were
pulled from the website while this paper was in draft form.
And yet this high-cost zero-revenue litigation-prone12 start
up was recently acquired by Google for $1.6 billion, based
on the expectation that as a social network website it would
produce significant revenues going forward.
• MySpace was acquired by News Corp for $580 million,
with a similar and similarly vague value proposition.
It is not clear to what extent revenues on these websites are
expected to come from membership fees, corporate sponsorship of
messages, traditional advertising, or other business models. News
Corp’s press release about their purchase of MySpace emphasizes
“ … their commitment to expand its Internet presence by offering
a deeper, richer online experience for its millions of users.”
Google’s oddly similar press release describing their rationale for
buying YouTube discusses “…a successful brand and passionate
community. The combined companies will focus on providing a
better, more comprehensive experience to users… .” Neither
provides much information about what is actually planned, what
services will be provided, or who would pay for them or why.
The stated hope for both acquisitions is that advertising revenue
will pay for and support for huge amounts of money that each site
was purchased for. But how this will happen is deliberately left
vague in both press releases since neither News Corp nor Google
really knows how this anticipated advertising revenue would play
out. Since these online communities are not really social networks
and since users do not go to those sites for advertising-based
content about a range of products, the assumed huge advertising
revenues may not materialize. The assumption for both
acquisitions, that advertising revenue will follow, is shaky at best
especially for the amounts paid for each site. The purchases have
an all-too-familiar resemblance to the wild escapades of the
dotcom era when fortunes were paid for sites with no revenue
stream and no strategy for generating revenue on a regular and
sustained basis13.
12
Not surprisingly, Viacom and others have indeed recently sued
Google for copyright infringement by YouTube; for example, see
the article in the New York Times,
http://www.nytimes.com/2007/03/14/business/14viacom.web.html
?ex=1331524800&en=e9679584c2827550&ei=5088&. For an
interesting analysis of the basis of litigation and of YouTube’s
prospects, you can view the video posted on YouTube that
explains the case,
http://www.youtube.com/watch?v=rr9SQ4qkMMk&eurl=
13
Our viewpoint here is not universally shared. The age groups
that frequent Facebook, MySpace, and YouTube frequently “buy
stuff online”, but that they cannot shop online at these three
websites. As USA Today notes, “And that means that there may
be billions of dollars being left on the table by the major social
networking websites, according to an eye-opening survey to be
released today by the American Marketing Association.” Of
There are indeed some greatly entertaining and powerfully
engaging corporate-funded messages on YouTube:
• Dove soap’s self-esteem campaign:
http://youtube.com/watch?v=rJ9IPZLPGr4
The sales impact, and indeed the takeaways from these messages
remain unclear.
Dove, through research at OgilvyOne, learned that many women
do not, and cannot, aspire to the anorexic images of supermodels
with airbrushed skin and perfectly symmetrical features, and
learned that these women feel that products advertised using those
supermodels do not speak to them. By using women with more
average figures and facial features in their advertisements, Dove
hopes to capture those segments of the market that does not
respond to idealized models. The campaign on TV and in print
media has been successful but it is uncertain whether the
YouTube extension will add to that success. YouTube is not seen
by typical users as a place to go to look for presentational
advertising messages, and most of the intended Dove audience
will in all likelihood not even see the Dove message on YouTube,
much less respond to it.
The Dove campaign on YouTube, if indeed it is a campaign and
not a spontaneous posting, cannot be taken as future examples of
how advertising will work in social networking websites for at
least 3 reasons
• It does not directly sell nor provide any way to assess
whether they contribute to sales
• If many brands chose to clutter these sites with videos,
users will avoid them much as they avoid pop-ups now as
intrusive, annoying, and unnecessary
• Like “guerilla marketing,” this kind of supposedly
entertaining video will have a relatively short life before
its intended viewers will move on to the next new thing,
and this move will almost certainly be hastened by clumsy
attempts at commercialization
Although they are amusing enough for repeated viewing, the
Dove posting may not serve as a long-term model for how these
websites will generate ongoing revenue for their purchasers.
6. QUESTIONABLE VALUE OF SOCIAL
NETWORKING WEBSITES
The central issue in generating revenue from social networking
websites comes down to the extent to which they can be
understood as actual networks, akin to older — face-to-face —
networks. Actual networks create trust and credibility, precisely
those traits being lost by push advertising. These do not appear to
course, I cannot buy stuff online when I check USAir flights
(http://usairways.com/awa/) or check out TV offerings using AOL
(http://tvlistings.aol.com/listings/pa/villanova/comcast-merion-
digital-non-reb?zipcode=19085) or read the New York Times
(http://nytimes.com/) or check stock prices at the New York Stock
Exchange (http://www.nyse.com/). Does this suggest that all of
these websites are also leaving billions of dollars on the table?
How eye-opening would that be? See “Survey, Social-network
sites could also lure shoppers,” USA Today, p 1-B, November 24,
2006.
272
be the attributes that draw users to MySpace, Facebook, or
YouTube, and even if these are the attributes promised by
Linkedin, Linkedin does not appear to be able to deliver on this
promise. An informal survey of college students indicates that
Facebook, for example, is not seen as trustworthy, largely because
anyone can be added to a list of “friends” or can choose to add
himself or herself to the list. Students are very wary nowadays of
the outside intrusion of unwanted people and perspectives when
they are online and are careful not to put themselves in adverse or
potentially dangerous positions. A virtual community does not
substitute for an actual community and someone known only
online is not a “real” friend. While signage for Budweiser on
Second Life happens, it does not lead users to say, “Bud is best”
or “I want a Bud.” Worse, such signage can be seen as
unwelcome, the penetration of the bad aspects of the real world
into the virtual world. Users in these sites want a sense of control,
of active participation, and advertising can only limit that positive
vibe. Direct product advertising aside, even recommendations
from virtual “friends” are not trusted as they are easily seen as set-
ups and these virtual friends do not have a history of
trustworthiness that is basic to valuing a product suggestion.
Understanding the relationship between real and virtual
connections is basic; it is premature to assume that the real and
virtual social relationships are similar, and premature to assume
even if they are similar that virtual relationships can readily be
commercialized without affecting the value of the relationships or
the attractiveness of the online social network. It seems that the
purchase of social networking websites has neglected developing
this understanding or using this understanding for the
development of business models or accurate valuations; rather, the
acquisitions appear to be a second wave of dotcom hubris.
We believe that most social networking websites will not work as
advertising websites. Indeed, the current valuations, and the
current justifications claimed for acquisitions, appear hugely
optimistic and based on the discredited theories based on eyeballs
and click-throughs that featured so prominently in the disasters of
the first wave of eCommerce. Any analyst valuing a social
network apparently may still need the following obvious
reminders:
• A virtual community is not really a community
• A virtual friend is not really a friend
• Product recommendations from virtual friends may be
neither welcome nor trusted
• Paid product positioning — seeing someone drinking a
Budweiser beer in Second Life or treating a virtual car with
a virtual car wax — is likely to be seen as at best absurd,
and not as an indication that the non-virtual product works
well and confers status in meatspace.
We understand that some virtual friends do become real friends,
complicating this analysis. Gamers, in particular, appear to form
close relationships that can be transferred into the live
relationships.
We believe the following three propositions to be true, but need to
follow up and verify them:
• MySpace does not appear to be a trusted community on
college campuses; this needs to be explored further.
 • Advertising on Facebook or MySpace will either be
unseen by Millennials or ignored; it will not be welcome
or trusted or credible; this needs to be explored further.
• In those instances where push-based advertising and paid
content is seen by users as truly intrusive and truly
offensive, it may be sufficient to slow growth and
eventually tip the balance towards a new entrant.
Although those who are making enormously expensive
acquisitions of social networking websites believe that
their current user population represents an enormous
network effect benefit to users and a correspondingly large
barrier to entry for later competitors, this may be
overstated and needs to be explored further.
7. SOME WEBSITES MAY HAVE VALUE
7.1. Selling Something
If I’m selling me or my group’s music on Facebook or MySpace I
may be willing to pay for sales that result or to pay for hits.
Although the descriptive and narrative content on many Facebook
and MySpace websites seems fatuous at best, artistic content
(music and art available for download) really does speak for itself,
without much possibility of hype. The music either does or does
not sound good, and the potential buyer either does or does not
like the samples he hears. Sampling artistic content before
purchase does contribute to informedness and this sort of content
may produce revenue for the website operator.
7.2. Selling Information About Things:
Peerage and Purchase, People to People,
Things to Things
If consumers trust a website enough to request product referrals
then the requests contain information that can be valuable to
producers and retailers. If consumers request referrals that cannot
be satisfied, because the products or services do not yet currently
exist, this can potentially be even more valuable. The aggregate
information of which consumer segments want to buy goods and
services, with which attributes, and in what combinations,
whether or not these products or service are currently available,
could have real value.
People associate with other people, sometimes considered friends,
but more often called peers. But people are associated with
objects and objects are associated with each other, allowing us to
write about the social life of objects [1]. A new understanding of
the various peerage systems may emerge from analysis of users’
website profiles on MySpace and Facebook and of their pur-
chasing behavior or of their requests for product and service
referrals:
• People to people peering — the new market segmentation
• People to stuff peering — new product positioning
strategies
• Stuff to stuff peering — as yet unexplored, unexploited,
and poorly understood. We always knew that port went
with Stilton, that ham went with eggs, and that gobi
paratha went with hot lime pickle. We may learn that a
fine blue blazer now goes with tattered blue jeans rather
than khakis, or that a new iPod is the new male jewelry,
replacing an expensive wristwatch. We don’t yet know
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how companies would use this information, how the
websites would obtain it, or how the websites would
charge companies for it.
• In a virtual world we can all look exactly as we wish. At
present, male avatars in Second Life appear to be hunky,
and female avatars appear small-waisted and busty. Will
this change? Will avatars begin to look like people, rather
than idealized people? Will changes in avatar style
provide leading indicators for changes in meatspace style?
Or are the two worlds so different that our virtual
preferences will not provide indicators of our real world
preferences? Might I explore things anonymously in a
virtual world that would never interest me in my real life?
Or might I explore things in a virtual world that truly
interest me, and eventually gain the confidence to exhibit
them in my first life?
7.3. But What are We Learning that We
Transfer To Our Physical Meatspace?
It may indeed be possible to find activities for which Second Life
is appropriate. Organizations are experimenting with holding
meetings in virtual space. Such meetings give you a chance to
observe who is “raising his or her hand” and who is interacting. It
is probably far easier to fake interest, or even fake attendance, in
Second Life than at a meatspace meeting or in video tele-
conferencing, and we suspect that Second Life offers a poor
substitute for video teleconferencing rather than a good substitute
for travel.. Still, there was considerable interest in Second Life at
the most recent sessions of the World Economic Forum in Davos.
Virtual world Second Life is a hot topic at the World Economic
Forum this year, according to The Independent. Indeed, even the
forum’s founder and chairman, Klaus Schwab, has his own avatar,
or virtual identity, and Reuters is conducting interviews with
major players at Davos at its virtual bureau in the Second Life
realm. This is likely to increase the number of big companies that
have a presence in the alternate computer world, owned by Linden
Labs. Picking up the climate-change theme at this year’s
gathering, Linden’s chairman, Mitch Kapor, told the newspaper
that Second Life could help reduce carbon emissions if big
business conducted meetings in the virtual realm rather than
jetting around the world for face-time14, assuming of course that
such virtual meetings are effective substitutes for travel, or for the
more closely related video teleconferencing.
Non-business uses of Second Life may be even more difficult to
commercialize, especially as sources of information that can be
used by physical product companies. The first thought is that we
can learn what to market by obtaining unique insights into what
people would choose to be, freed from the constraints imposed by
accidents of birth or by the laws of physics. Tracking avatar
design teaches us surprisingly little so far. Initial “default”
avatars are overwhelmingly uninteresting. With considerable
investment of time (in avatar design and construction), or money
(for direct avatar purchase) individuals can select their Second
Life appearance. In theory their selected appearance should be
quite instructive.
14
http://dealbook.blogs.nytimes.com/2007/01/26/davos-in-the-
papers-second-life-wto-talks-ceo-pay/?ex=1170478800&en=
cbc56a6f94843f1f&ei=5070&emc=eta1.
It is not immediately clear what we are learning that is new, or
that can bet transferred to our physical meatspace. It is clear that
most people, at present, choose to design avatars that are very
close to, or even move beyond, stereotypical images of male and
female ideal forms (see figure 2). This does not teach us anything
that we can directly use in product design or marketing.
Likewise, it is possible to adopt avatars that have no direct analog
and indeed can have no direct analog in our physical world (see
figure 3). These, too, are difficult to transfer to our physical
world. Even the status symbols of our physical space, such as hot
tubs and yachts (not shown here), seem to port to Second Life,
even if it is not clear that they actually be enjoyed in a virtual
space, and even if it is clear that they offer neither exclusivity nor
status in this virtual environment. In brief, it is not yet clear what
we can learn from observations of this virtual world.
It is too easy for those not taken up in Second Life to dismiss it.
The actor and acting instructor Lee Devin notes that Second Life
can be viewed as simultaneously watching and acting in a
movie. Many of us find watching a movie deeply engaging; why
would it be any less engaging to watch a movie in which one of
the characters was your chosen metaphor for yourself, and in
which the actions of this character are at least partly controlled by
you? The acting may not be Olivier, the script may not be
Shakespeare, but they are still you and yours.
Figure 2. More residents of Second Life, taken from Flickr.
But what, exactly have we learned about how people want to
look that we did not already know?
Figure 3. More residents of Second Life, taken from Flickr.
But again, what have we learned about how people want to
look that we can actually use?
7.4. Performing — The American Addiction
Performing is a widespread American addiction, as we can now
see in a spate of TV shows, of which the biggest example is
American Idol. Here Democracy meets Horatio Alger and the
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range of Survivor reality TV shows meets Warhol’s 15 minute
allocation of fame for everyone. Increasingly, show business is
now about me, or about a possible me, rather than about “stars”,
“celebrities” or various distant others. This trend builds on the
confessional worlds of the daytime talk shows (such as Montel,
Oprah, etc., and the pornographic “everyday” dramas of Jerry
Springer). American Idol (or the much more modest fashion show
out of Parsons in New York, called Project Runway) brings these
elements together by pushing and promoting the principle that
“anyone can be anything that he or she chooses.” This is one
driving principle behind all social network websites, but it is a
particularly strong motivator for virtual reality websites like
gaming sites and Second Life. Performing in Worlds of WarCraft
allows for differences in skill and status, and devotees (or addicts)
often claim that the friendships that they have made are as
compelling as many they have made here in meatspace.
8. PUTTING SOCIAL IMPACT INTO
ONLINE SOCIAL NETWORKS: THE
FINANCIAL VALUE OF TRULY
RESONANT ONLINE NETWORKS
Some websites may indeed produce sufficient resonance to create
strong virtual communities, and these strong virtual communities
may have significant monetary value. Two New York
entrepreneurs, Paul Lambert and Jonas Nielson, are bringing The
First Wives Club — The Musical to Broadway. Based on the
best-selling novel and successful movie, the concept of First
Wives appears to have real power and resonance with women for
whom a recent divorce remains a salient life event. Related to the
musical, the entrepreneurs are also developing a powerful tie-in
with a social network website, http://www.firstwivesworld.com/.
Since the importance of the divorce event bonds these women,
they may indeed turn to the website to explore emotions and
experiences that they are unwilling or unable to explore with their
existing social networks, their family and friends. The intent of
firstwivesworld.com is “girlfriends helping girlfriends” and “out
of the pain, growth and hope.” The power of the online experi-
ence and of online friendships may give this website much of the
character of a true community, and the developers expect that
friends will post content, and recommend products and services
that they have found especially valuable, review retailers and
service providers who provide extraordinary service (either good
or bad).
The developers believe that some women will become more than
casual visitors, but will become virtual citizens of
FirstWivesWorld, much as others are becoming virtual citizens of
Second Life. Indeed, Paul and Jonas argue that any successful
social network or virtual community website must create bonding
by being both personal and participatory. The stories and content
must relate to them; indeed, the stories and the content must, to
some extent, be theirs. If Kraft (maker of well-known brands like
Cracker Barrel Cheddar, Philadelphia Cream Cheese, Kool-Aid
and Tang) can get viewers to its post to its community website15)
then the power of personal stories and participation can certainly
15
See http://kraft.liveworld.com/thread.jspa?
threadID=1700000607&tstart=5&mod=1175103128112 for an
example of the sort of interactive exchange that Kraft has been
able to stimulate.
draw women to a website where they can post content about
painful experiences and learn from others how best to cope with
them.
Steady viewers of and participants in First Wives World will
come to trust the website. These women probably will explore
product recommendations among each other, and probably will
value impartial product evaluations and certifications from the
website itself as well as those from other virtual citizens in their
virtual social network. Corporations will not be permitted to
advertise on First Wives World, but trusted partners will be
permitted to purchase corporate sponsorships.
And, of course, multi-user virtual reality websites like Second
Life or gaming websites may themselves produce significant
revenue in a number of ways:
• The websites can charge for software, or monthly fees for
participation, or fees for time in country in the virtual
world; gaming websites in particular charges fees of this
kind
• The website can charge fees for homesteading (that is, for
property rights to prime virtual locations), for virtual
world equipment upgrades, or for other work performed
for the in country character or his or her virtual
possessions. In Second life these can be purchased with
LindenDollars, which can be exchanges for real (US)
dollars. Indeed, developers and speculators are actually
profiting; profits are small but growing:
http://secondlife.com/whatis/economy_stats.php
• As noted in section 7.2, it is not clear that much of the
behavior observed in virtual worlds will support inferences
about commercial opportunities in the physical world. It is
questionable if we can learn enough from observing
consumption behavior in the virtual community to make
inferences about the same consumers’ purchases in the
physical world; indeed, I’m not sure that it would mean
anything to see an avatar reject a Budweiser in favor of
good Belgian Trappist Abby Ale like a Westmalle Tripel
or a Westvleteren 12, or to decide that an ale like that
called out for a smoked Gouda or a Roquefort.
As intriguing as the Second Life phenomenon is to researchers
and to journalists, it is all-too-easy to over-state its importance
and its potential. Second Life was recently featured on Good
Morning America, in which claims were made that virtual reality
experiences will become as big and as important as email; we feel
that this is most unlikely. Email is a way of performing
asynchronous communications asynchronously, either because the
various parties cannot locate each other in real time, because real
time response is not required, or because lengthy documents must
be transferred more quickly than by physical document delivery.
Email is more reliable and more convenient than voice messaging,
and allows for more complex messages and attachments than
voice messaging. Ultimately, with better integration of voice with
traditional document files, email may yet be replaced by a hybrid
that looks as much like phone messaging as it does like email; the
inclusion of avatars adds little to real communications, and it is at
least possible that Second Life may be much more like 1970s CB
radio, a short-lived and temporarily fashionable pseudo-hip
diversion, than a real mode of communication.
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9. MAJOR SOURCE OF UNCERTAINTY
We have several sets of questions:
• Can any social networking website attempt to
commercialize trust without destroying that trust? Can
websites charge for advertising, or receive payments for
positive recommendations, without destroying the trust of
its users and becoming seen as just another source of paid
messages rather than of real conversations of and two-way
communications between customers and firms? In brief,
can trust be monetized, or does the mere attempt to get
paid for trust destroy it?
• Can any social networking website attempt to steer traffic
without destroying trust? Can it attempt to control
interactions to commercialize them without destroying
trust?
• Do social networking websites actually move business?
Do they deserve to be paid, quite separate from whether or
not any mechanism exists to monetize trust?
Questions in the first set remain unanswered and they pose the
biggest challenge to commercializing and monetizing News
Corp’s investment in MySpace, and, for that matter, the most
interesting strategic questions facing First Wives World.
Questions in the second set are closely related; that is, if websites
can create business just by steering users, and if users will tolerate
content that attempts to steer them, then MySpace, Facebook, and
Flickr may have huge untapped value. It is plausible, but
uncertain, that in many instances users would abandon websites
that were populated by pseudo-users who were little more than
paid corporate shills.
Finally, it is useful to assess whether websites can move traffic,
since it is indeed possible that any website that has traffic may
find a way to turn that traffic into billable routing of traffic with
more a more overtly commercial missions. That is, any website
with significant numbers of eyeballs may find a way to convert
those eyeballs into billable click-throughs. At present, estimates
are that as much as 10% of the traffic to the wide variety of music
websites in the UK come via MySpace. While this is indeed
impressive, several questions remain and are not answered in the
web posting16:
• How many of these click-throughs ultimately represent
sales?
• How many of these click-throughs are incremental? That
is, how many are the result of music recommendations
from virtual online friends, and how many of the resulting
hits on music sites would have resulted even without the
Facebook visit?
• How stable is this pattern? That is, are these click-
throughs the result of a recommendation (“I want to see
that site because it was recommended to me by a
friend”)and how many result solely from the fact that the
viewer has been introduced to a new site by the online
friend? The pattern of click-throughs resulting from
recommendations for new music may be stable and may
even increase over time. In contrast, the pattern of click-
16
See http://weblogs.hitwise.com/heather-hopkins/2006/11/
bebo_and_myspace_network_maps.html.
 throughs resulting from the introduction to a new site may
decrease over time as viewers become more familiar with
the websites available, develop their own viewing habits,
and set their own book marks.
Data suggest that the patterns of traffic and the sources of clicks
are indeed not stable over time. Even today, search engines and
direct search already quickly replace website referrals for each
group, and time span during which referrals truly contribute the
sales for a group will be limited. We remain uncertain about the
following:
• Can this traffic be hijacked, by Murdock or others?
• Will it be trusted if it is hijacked, or even harnessed? That
is, can this traffic be monetized?
• How much of the initial word of mouth really does come
from uncontrollable websites like blogs, and how will the
percentages shown above change in the next two to three
years?
10. CONCLUSIONS
10.1. Forces at Work
We believe that Resonance marketing allows every consumer to
decide what he wants, based on true informedness rather than
settling for a compromise product that has been hyped by adver-
tising.
Any attempt to predict the future of advertising must understand
both consumer behaviors with regard to shopping and their
behaviors in their use of the internet:
• Consumers use the net to see what they want and do what
they want, when they want it. The net will not support
entrapment, and consumers who are escaping ads through
TiVo are unlikely to become attracted to full time
advertisement programming
• The modern consumer views the net as transparent, and
community postings and the recommendations of friends
will outweigh paid placements, and paid reviews. Place-
ments of products in movies or in video games are likely
to be ignored; the presence of advertisements directly into
movies or video games will be resented.
Virtual reality websites simply are not ideal for encouraging
online consumption or for encouraging consumption in physical
space:
• It’s meaningless to drink a beer online, and pointless to
attempt to influence my selection of a beer by drinking one
online with me. I can’t taste anything online, and I know
that you can’t either.
• It’s impossible to convince me to fly your airline by
allowing me to fly it in a virtual world; why would I waste
time in a virtual world when I can move instantly?
• You can probably get me to listen to music in a virtual
reality setting, and I might even buy it afterwards; if you
get me to view a movie online in virtual reality, I probably
no longer need to buy it or to see it again.
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10.2. Predictions
Some phenomena are too complex to predict right now. If a truly
stunning avatar were to be seen carrying a great new product, or
wearing a bold new style, that might indeed influence styles in the
meatspace world.
Consumer media viewing behavior, consumption behavior,
receptivity to advertising, and use of information in purchases are
all changing. The changes are profound, and they interact in
complex ways that confound easy analysis. The most tempting
response among advertisers and among their agencies is to assume
that the most significant changes are in media choices and
viewing behavior, which requires the smallest response — change
the venue in which ads appear, and change their format as dictated
by the new media. While we do not yet know enough to
determine if a change in advertising venue will be sufficient to
restore the power of advertising, we suspect that it will not be, and
that the high valuations placed on early social networking
websites may be irrationally high, even as hedging bets.
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